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Weekend reading: Caveat emptor needs to make a comeback

Weekend reading: Caveat emptor needs to make a comeback post image

What caught my eye this week.

I mentioned the other day that I’m getting increasingly grumpy about the supposed victims of financial misdeeds seeking redress for shooting themselves in the foot.

Not a popular stance for a personal finance blogger to take, but the truth.

Paul Lewis for instance on Radio 4’s MoneyBox reliably turns me to the Dark Side like a neophyte Sith Lord as he rails against – oh, I don’t know – Tesco having the temerity to sell apples at ‘rip-off’ prices of more than what it paid for them.

A more serious example came this week in the Financial Times [Search result] in an article about interest-only mortgages.

The FT is not the first publication to warn of a looming crisis from interest-only mortgages. The charge is that borrowers have not saved up enough money to repay the capital at the end of the term.

And to be fair, the FT didn’t quite headline the mis-selling angle in this piece, though it did raise the juicy prospect.

But a victim narrative was certainly foreshadowed in the angle it took and the quotes it used.

The article led by painting a picture of a son being denied the inheritance of the family home because of his mother’s decision to take out an interest-only mortgage:

Linda needs to have a difficult conversation with her son. The expectation was that one day, he would inherit the family home in London where she still lives. But her decision to take out an interest-only mortgage of £182,000 nearly a decade ago has effectively cost him his inheritance.

Well, no.

I don’t know Linda’s circumstances, obviously, but from as much as we can tell here it was her decision not to save up to repay “a penny of the underlying debt” that has cost him his inheritance.

Alternatively, if she would never have been able to find the money to pay for what she bought, then she shouldn’t expect to own it.

That’s not a scandal. That’s shopping.

Later on we have Gary, who claims “we didn’t have things explained to us”. This might point a way forward to the sort of compensation windfall enjoyed by the PPI-paying masses, except that Gary immediately adds “Anyway, our hands were kind of tied at the time — it was more or less our only option.”

I don’t mean to dismiss the issues faced by these people, or make fun of them; I’m sure they have their worries. But they are in the victim role as portrayed by the FT, and it’s a role that needs to be challenged.

Why not a piece saying that the rest of the banks’ customers or shareholders – or the State – will need to bail out these kinds of individuals if they’re not to be turfed from their homes entirely because of their own decisions? Somebody always pays.

As for mis-selling, happily this kind of mortgage’s purpose is made pretty clear in the name itself.

We’re not talking about a Property Financing Multi-Year Upkeep and Retention Vehicle, or some other financial nonsense.

It is an Interest-Only mortgage. As in – slowly now – you only pay the interest.

Enough already.

From Monevator

The FCA is avoiding the elephant in the room – Monevator

Global tracker discussion sprang to life this week [Note: “Next Comments”]Monevator

From the archive-ator: Know your own risk tolerance – Monevator

News

Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

UK state pension age rise brought forward by one year – BBC

Global shift into alternative assets gathers pace [Search result]FT

House price growth continues to slow, especially in London – Telegraph

US tech sector passes its dotcom era peak [Search result]FT

Online fund platforms surge in popularity [Search result]FT

Products and services

Atom Bank’s 5-year fixed rate mortgage charges just 1.59%; remortgages only – ThisIsMoney

Fixed-rate savings bonds’ interest rates rise 36% since January – Telegraph

Nationwide pulls insurance for cyclists who won’t wear helmets abroad – Telegraph

All charges for paying by debit and credit cards to be banned – Guardian

Comment and opinion

Why index funds are one of the 50 things that made the modern economy [Podcast]BBC

Costs are a key part of the investing equation, but so is time frame – The Value Perspective

What’s your track record? – A Wealth of Common Sense

You probably don’t have what it takes to beat the market – MarketWatch

What does an investment portfolio need? – Oblivious Investor

Betting on things that never change – Morgan Housel

Finding the active in low-cost passive investing – Barry Ritholz

A recipe for disastrous stock picking returns – Investing Caffeine

Why Josh Brown bought his first Bitcoin – The Reformed Broker

Thoughts on 20 years in work […in finance, but universal]Principles and Interest

Retirement dread is replacing the American dream – Bloomberg

The real value of a financial advisor [US but relevant]The Backcourt Report

Todd Wenning on competitive advantages and moats – Compounding Snowballs

Given the reviews, I’m glad we turned down the How To Retire at 40 people’s overtures – Early Retirement Guy and SexHealthMoneyDeath

Off our beat

The battle for the moon begins – Bloomberg

Boring Elon Musk update – Bloomberg

And finally…

“The conventional investor is in awe of those who have a deep understanding of ‘what the market thinks’. He should be: he is typically paying enough for the privilege.”
– John Kay, The Long and the Short of It

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 26 comments… add one }
  • 1 Moongrazer July 21, 2017, 8:00 pm

    Hargreaves Lansdown have the lion’s share of the market AND among the highest fees! Goes to show what market dominance does for competition.

  • 2 The Rhino July 21, 2017, 9:02 pm

    There’s a months window of opportunity to cash out from ratesetter for free at the moment if that’s of interest to anyone. Could have missed it if like me you ignore most of their email s

  • 3 Noedig July 21, 2017, 9:33 pm

    Yes I read the FT article. Poor journalism really. Not a whiff of mis-selling. More than a whiff of want-it-all-without-paying-for-it, passing itself off as victimhood. Made me deeply disappointed with the FT, a paper I love, because the line taken was so contrary to the facts. Not a hint of the opposing viewpoint richly represented in the comments to the article, many of which are quite blunt.

  • 4 Steve July 21, 2017, 11:01 pm

    I had a interest only mortgage and run a all share tracker along side it to pay it off at the end,I read about this approach and liked the way the numbers stacked up.
    I paid the mortgage off early without having to use the tracker money so I still have that.
    Just trying to point out an interest only mortgage can be a part of a strategy and there is nothing to stop you running an investment alongside it.
    It was also a offset mortgage so I could put lump sums in as and when I could afford.
    This wasn’t a standard set up by any means and I got a few questions from the estate agents and mortgage sellers.

  • 5 Learner July 21, 2017, 11:23 pm

    So they owe 182k on a 550k property for which they have paid in ~10k/yr, yielding 500% return pa. Logistically awkward but good lord..

  • 6 Carolyn Gowen July 22, 2017, 8:00 am

    Re interest only mortgages – well said

  • 7 Stephen iles July 22, 2017, 8:21 am

    Three cheers for you highlighting the fact that you cannot protect people from themselves. It really annoys me when people make poor decisions and then try to blame someone else.

    Well done to Steve in the comments above – he shows how it can be done.

  • 8 Gregory July 22, 2017, 10:48 am

    Retirement dread is replacing the American dream – this is a global trend. I’m quite sure there will be more and more unrests in all parts of the world. Huge inequality always led to revolutions, wars. Hamburg was a good overture. Just be patient and wait:) “That men do not learn very much from the lessons of history is the most important of all the lessons of history.” https://www.youtube.com/watch?v=CAiamEOoLic

  • 9 hosimpson July 22, 2017, 11:04 am

    A family home in London bought ten years ago, with an outstanding mortgage of £182k? Given what happened to house prices in London over the past 10 years, they will have made at least £100k in home equity over that time.
    The son is not going to “lose” the house – he’s still going to inherit it. It’s only that his mother’s estate will have a liability for the outstanding mortgage balance which will have to be discharged either from funds in the estate or by selling the property. So his inheritance is not going to be as large as he’d like? Greedy little shit.

  • 10 PC July 22, 2017, 11:29 am

    Couldn’t agree more about interest only mortgages. I have one and it suits me very well.

  • 11 Ric July 22, 2017, 1:54 pm

    Very well said about the interest only mortgages… and the same for most of the other “mis-selling” scandals.

    I’ve had both interest only (paid off decades early like Steve in the earlier comment) and a repayment mortgage (also repaid decades early). So logically if the greedy little tikes ever manage to claim miss-selling, should those of us who actually paid back our debts not be entitled to a rebate? Otherwise we’d be disadvantaged. Non-sense of course, but this is the lunacy of the suggestion.

  • 12 Playing with Fire July 22, 2017, 2:21 pm

    We need a licence to drive, to own a firearm, or to provide certain financial services.

    As there are clearly so many people failing to understand what ‘interest-only’ means, perhaps we need an additional licence? And if you don’t pass your adult-test then you need an appropriate adult to supervise your decision making. Or if you don’t understand that the job of salespeople is to sell you shit that you don’t need, you clearly need some additional supervision and guidance.

    There is definitely sharp practice in all the lending and home selling that occurred prior to the last housing crash, but the existence of an IO mortgage isn’t miss-selling.

  • 13 Aron July 22, 2017, 3:57 pm

    “I’ve had a letter from my lender asking what I intend to do, but I’ve ignored it,” she says, admitting she has no way of paying off the debt. “It gives me headaches just to think about it.”

    Brilliant.

    Great attempt at adulting there, and she is a teacher as well! Amazing.

  • 14 Mr optimistic July 22, 2017, 3:59 pm

    What great comments. What about the low cost endowment mortgage business? Isn’t that another one ?

  • 15 Pinsticker July 22, 2017, 4:26 pm

    Interest only – does what it says on the tin.

    Low cost endowment mortgage – the tin will be locked in a secret place until the last possible moment.

  • 16 PC July 22, 2017, 5:20 pm

    What I do have an issue with – with interest only mortgages – is lenders that refuse to re-mortgage or extend the term for no good reason other than an arbitrary age limit. It’s not always the answer, but should be an option.

  • 17 Gadgetmind July 22, 2017, 6:03 pm

    We also have an interest only (offset tracker) mortgage at 10% LTV that was used to fund a loan to daughter for her to buy a house. She gets a cracking interest rate as a result (yes, she effectively has a mortgage with my wife via a promissory note) and lots of flexibility regards repayment. She’s just qualified as a Doctor so should be able to mortgage in her own name but no rush.

    These mortgages have their place but it’s probably a good thing that it’s harder to qualify for one nowadays.

  • 18 SurreyBoy July 22, 2017, 7:45 pm

    I watched a colleague take out an interest only mortgage years ago. He wasnt made to take out an associated investment to meet the end repayment. The reason my colleague went IO was the the house was so expensive, the repayment mortgage couldn’t be afforded. I did ask what would the plan be when the mortgage expired 25 years later and the answer given was that “something will come up or i will get pay rises and knock chunks off etc”. I dont know if he ever did, but im guessing not.

    I’ve never had an IO mortgage but can see they have a place. If you are young and expect your pay to rise fast so you move to repayment in future, or you are very confident of inheriting perhaps. Or if you are confident you can invest such that you can pay the thing off earlier than a repayment mortgage.

    Amazingly though (to me) many people seem worried about how they will repay these products. I have no sympathy, and even less after all these years of below trend interest rates. Living in London on (say) 2% interest on a loan of £182k is a dream for most.

  • 19 Richard July 22, 2017, 10:18 pm

    IO can be a great approach for a few reasons, the main requirement being you could easily afford the capital repayment mortgage (on primary residence). Low monthly commitments means if you lose your job you can survive a lot longer than on repayment (and job security is not what it used to be). Invest the difference in a pension and get tax relief as well as likely higher gains than the interest payments. Or use the money to buy a BTL and invest the profit (doesn’t matter if you hand the house back to the bank and pocket the capital gain and rent payments at the end of the term really).

    It is a very poor approach if the only reason you are using it is because it is the only way you would ever afford the monthly payments. This is the road to pain latter on!

  • 20 Learner July 22, 2017, 10:23 pm

    I guess the IO loans point would have been better made with someone who actually lost out on the deal (say, with a home that hasn’t tripled in value) instead of this person who made out like a bandit.

  • 21 DaveK July 23, 2017, 8:32 am

    I usually get very annoyed with people who post “I agree” or such like like and add nothing to the discussion, but just this once…..I agree !

  • 22 Mathmo July 23, 2017, 12:51 pm

    The danger here, of course, is that if enough people feel they are victims then the product will be withdrawn for those who find it useful. Given that property is probably the best and most available form of investment leverage available to many investors, interest-only jacks that up even further. I’m not sure I’d have it on a principle residence, but it’s almost nuts not to have it on an investment property.

  • 23 Martyn July 23, 2017, 2:03 pm

    Not to mention an explicit decision by the establishment to keep interest rates low and feed in tons of cash into the banking system (and dark threat threats about the banks not lending the money), being replace now with worry about the consequences (people have apparently buying cars!)

  • 24 L July 24, 2017, 7:39 am

    I’m with DaveK in complete agreement 😉

    I’ve been reading the financial press daily? for a decade now, this is not new news!

    I also agreed with hosimpson’s point that the son wasn’t getting nothing, but thought he was a bit harsh on the son, who we haven’t heard from.

  • 25 Gregory July 26, 2017, 8:35 am

    I’m right (see my earlier comment). Grim future. More than 1 in 3 American households could easily fall into poverty if they lost their jobs. https://moneyish.com/hoard/1-in-5-americans-would-default-on-their-bills-within-a-month-if-this-happened/

  • 26 Anon July 30, 2017, 2:29 pm

    I’m told that in Switzerland the norm is for properties to have 2 mortgages… around quarter to half the value of the property will be covered by the deposit plus a conventional repayment mortgage, and the rest will be interest only. Apparently the interest-only part is called “the hypothetical”… because it’s purely hypothetical that you’ll ever pay it off. I’ve no idea how happy the Swiss are with this state of affairs or how long it’s taken them to get there… but if it’s a model for how low interest rates can collide with insatiable appetite for an asset in short supply, I wouldn’t be surprised to see it become increasingly common in the UK too (at least if punters become savvy enough to stop buying leaseholds they can’t actually afford).

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